As an owner of commercial real estate, you have several choices deciding how you will set up your leases. For some, the favored choice is a full service gross lease (also known as an FSG lease). In this article, we’ll answer, “What is a full service gross lease?” and we’ll explain how to structure one. Then, we’ll work through a full service gross lease example and answer some frequently asked questions.
What is a Full Service Gross Lease?
In an FSG lease, the landlord is responsible for paying the maintenance, property tax and insurance bills. In fact, an FSG is only one of several types of lease agreements. Moreover, landlords use a full service gross lease for multi-tenant properties and single tenant office buildings. Equally important, the arrangement is for the landlord to collect the rents and use the money for the property’s expenses.
Additionally, an FSG lease will contain what we call an escalation clause. Specifically, the clause serves to protect the landlord from the ravages of inflation. That is, the clause allows the landlord to raise rents over time. Naturally, the landlord uses higher rent collections to offset increased taxes, as well as higher insurance and maintenance costs. Of course, the FSG lease spells all this out in detail. Prospective tenants must be sure to understand the terms of the lease agreement, including any escalation clauses.
How to Structure an FSG Lease
A full service gross lease describes the required actions and responsibilities of the landlord and the tenant. By the same token, it is a written legal agreement that both parties must execute. There, you will find language describing payments and services in order to avoid landlord-tenant conflicts. In fact, clarity is the hallmark of a well-written full service gross lease, and for that matter, for any proper and legal agreement.
The structure of a lease depends on its type, including financial lease, operating lease, direct lease, and sale/leaseback leases. Overall, there are two types of gross lease structures:
- Full Service: This is a gross lease that contains some kind of language to handle inflation. Correspondingly, the tenant is responsible for rising operating expenses after the first year. We call this provision an expense stop.
- Modified: A modified gross lease is like a net lease, in that the tenant pays certain costs. For example, these might include insurance, property tax, utilities, repair and common area maintenance (CAM).
In addition, the other basic type of structure is the net lease. Therefore, please see our article on net leases for full details.
Terms Used in a Full Service Gross Lease
These are some terms you will find in an FSG lease:
- Real Property: This is the entire property the landlord owns. For example, it’s a shopping mall that contains retail stores.
- Demised Property: This is the space the landlord is renting to the lessee. For instance, it’s a retail store within a shopping mall. Typically, the lease specifies a property map and the tenant’s access to services, like cleaning, security and snow removal.
- Term: The period between the lease start and end dates. Alternatively, the lease might specify a month-to-month tenancy, or perhaps automatic renewals until one party terminates the lease.
- Base Rent: This is the starting rent, without additional expenses.
- Operating Costs: Additional expenses, such as property taxes, advertising, utilities, and so forth. Naturally, the lease defines which costs the landlord pays and which the tenant pays, if any.
- Security Deposit: The tenant’s upfront payment to secure against missed rent payments and/or damage to the property. Normally, the landlord returns the deposit when the lease ends, that is, assuming the tenant returns the property back to the landlord in as good a condition as the tenant initially received the property.
- Occupancy and Use: These are rules that the tenant agrees to observe, such as no smoking on the premises. For example, the rules might involve after-hours noise, garbage dumping, and food service.
- Improvements: The lease should specify who is responsible for making improvements to the property, including who pays the cost.
- Contingencies: These are clauses that specify how to handle the costs for unusual events, such as fires and other disasters. Typically, other contingencies include the tenant’s bankruptcy, eminent domain, and arbitration.
Full Service Gross Lease Example
The calculations behind a full service gross lease are straightforward. Equally important, landlords quote rental rates by the square foot. First, figure the base rental rate, starting with the number of square feet. Then, multiply it by the annual cost per square foot. Finally, divide the result by 12 to get the monthly base rent.
Video: How To Compare Costs When Comparing a Net Lease vs a Gross Lease?
Imagine that you lease out an office of 2,200 square feet. For example, the annual rent for 1 square foot is $11.50. Therefore, the annual rent is:
2,200 SQFT x $11.50 / SQFT = $25,300 / Year.
Now, divide the result by 12 and the monthly base rent is $2,108.33.
($25,300 / Year) / (12 Months / Year) = $25,300 / 12 = $2,108.33
Obviously, because the landlord is offering a full service gross lease, the rent will be higher by, say, $200/month. Clearly, this makes the monthly rent payment equal to $2,308.33 for the first year. Additionally, the lease contains an escalation clause raising the rent each year by 2%. That means the rent rises to $2,354.50 after the first year.
Year 1 Monthly Rent: $2,200.00
Year 2 Monthly Rent: ($2,200.00 + $200.00) x 102% = $2,400.00 x 102% = $2,448.00
Year 3 Monthly Rent: ($2,448.00 + $200.00) x 102% = $2,648.00 x 102% = $2,700.96
Year 4 Monthly Rent: ($2,700.96 + $200.00) x 102% = $2,900.96 x 102% = $2,958.98
Year 5 Monthly Rent: ($2,958.98 + $200.00) x 102% = $3,158.98 x 102% = $3,222.16
Often, the rental agent takes a fee from the landlord. Typically, the fee is 6% for the first five (5) years, more or less. Thus, in our example, the agent’s fee is:
= 6% x 12 x ($2,200.00 + $2,448.00 + $2,700.96 + $2,958.98 + $3,222.16)
= 6% x 12 x ($13,530.10)
= 6% x $162,361.20
A Full Service Gross Lease is Win-Win
Both the landlord and the tenant can benefit from an FSG lease.
Benefit to Landlords
The landlord benefits from a full service gross lease because they get to control expenses. For example, the landlord might be finicky about common area maintenance, and would rather handle the CAM directly. The landlord can charge a higher rent for a full service gross lease, sometimes more than the cost differential. Furthermore, the landlord can put in an expense stop and/or escalation clause to ensure it caps the expense liability.
Benefit to Tenants
Tenants can avoid extraneous variable costs by agreeing to a full service gross lease. In this way, they can concentrate on their business and not the landlord’s business! Also, the tenant can avoid the responsibility for common area maintenance and a prorated amount for taxes and utilities.
Below is an online rent calculator. It has inputs for the area, total rental rate/square foot/year, and agent’s rate.
Frequently Asked Questions: FSG Lease
The different types of leases are full service gross leases, net leases and percentage leases. A triple-net lease requires the tenant to pay for property tax, insurance and common area maintenance. A percentage lease gives the tenant a lower base rent in return for a piece of the tenant’s gross. The landlord picks up all costs, including maintenance, insurance, property tax, utilities, and any other costs that may arise. In return, the landlord charges a rent that is costlier than a net lease. Yes, as long as it includes a way for the landlord to cap expenses. Usually, you accomplish this with an escalation clause or an expense stop. Either way, the tenant pays more money to compensate for the landlord’s loss to inflation. In a full service gross lease, the landlord picks up all the extra costs in return for a higher rent. Alternatively, in a gross modified lease, the tenant agrees to pay some expenses, as specifically spelled out in the lease terms. Of course, negotiations determine the exact split of expenses between the landlord and tenant.
The different types of leases are full service gross leases, net leases and percentage leases. A triple-net lease requires the tenant to pay for property tax, insurance and common area maintenance. A percentage lease gives the tenant a lower base rent in return for a piece of the tenant’s gross.
The landlord picks up all costs, including maintenance, insurance, property tax, utilities, and any other costs that may arise. In return, the landlord charges a rent that is costlier than a net lease.
Yes, as long as it includes a way for the landlord to cap expenses. Usually, you accomplish this with an escalation clause or an expense stop. Either way, the tenant pays more money to compensate for the landlord’s loss to inflation.
In a full service gross lease, the landlord picks up all the extra costs in return for a higher rent. Alternatively, in a gross modified lease, the tenant agrees to pay some expenses, as specifically spelled out in the lease terms. Of course, negotiations determine the exact split of expenses between the landlord and tenant.